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RobertEG wrote:
I think it is being a bit naive to state that income has no relationshop to ability tp pay debt... it certanly does. Paying requires both abiliity and willingness. I think a primary reason why income is not included in FICO scores is due more to the fact that income data is something that they simply do not have the ability to collect and update regularly. Just try to secure a home loan without disclosure of income, and you will realize that it does count. FICO is thus not an overall measure of try credit worthiness, but more simply a historical snapshot of how you have paid debt in the fairly recent past.
Lenders make the decision on your ability to repay a debt by your DTI ratio. FICO is nota tool utilized for this. FICO primary responsibility is to guage your willingness to repay not your ability
@Anonymous wrote:Lenders make the decision on your ability to repay a debt by your DTI ratio. FICO is nota tool utilized for this. FICO primary responsibility is to guage your willingness to repay not your ability
Uhm, not so much anymore.....try getting a home loan with very low DTI but a 600 FICO. It's all about the FICO because everyone is scared.
Why 600? Because I was an officer in a business that failed & when it failed the partners walked, leaving me holding the personal guarantee on several large lines of credit.........which I settled incidently paying the creditors.
It would be nice if that had trashed my business credit score & not my personal score, since I've got a 20 year credit file with no lates - but such is a weakness with FICO and now I play their game to try to raise my score.
@QueenBean wrote:It would be nice if that had trashed my business credit score & not my personal score, since I've got a 20 year credit file with no lates - but such is a weakness with FICO and now I play their game to try to raise my score.
The weakness was not with FICO but using your own credit (cosign if you will) to back the loans.
It would seem that the debt to income ratio would have as much validity as a behavior predictor as the credit availability to usage ratio. A similar issue applies to which credit one is using. I'd be very inclined to Max out a credit line with an interest rate of 0% over keeping a balance on a card that charged 12%. Indeed, if the interest rate is 0% it is a sounder financial decision to take the funds, stick it in an insured savings account paying 1% and pay off the debt when the rate rises. To properly factor this behavior it would seem one would need either the income, or liquid asset as one of the factors to compute probability.
Lenders traditionally refer to the "Three Cs" for credit decisions. Character, Capacity, and Collateral. Of these "Character," or propensity to repay, has proven the most important. There are plenty of stories of high income people that flake out on debts they can pay. But most people want to and do pay their debts even when it requires taking a second job or other adjustments. FICO scores are designed to estimate risk of default. This is predominantly "Character" which is the desire to pay one's debts but also indirectly can factor in some degree of "Capacity." A long, clean payment record with gradually increasing balances/util is associated with inadequate "Capacity." This can be from loss of a job or career change or excessive spending. FICO, while it may focus on "Character" isn't an exact proxy. For instance someone may lose a job in a declining industry and there simply aren't jobs available. This isn't a Character defect, it's just reality at times that people that intend and want to repay may not always be able to do so.
The collateral question comes up when people borrow for homes or cars or even secured credit cards. The collateral provides some protection for lenders and allows them to make loans that might not be possible otherwise.
Additionally, CRAs do not allow reporting of income and , while they can report employer history, this is spotty at best.
Lenders fill in the gap, usually with a special custom acceptance score which is usually based on FICOs but with added info such as income, and, for some issuers, other financial assets. For instance both Amex and Cap One apps have entries for optional things such as savings and investment portfolio size. If provided, these will factor into credit decisions. The recent Card Act actually encourages including income and assets in credit decisions though it is far from a widespread practice outside of those under 21.